Latin America’s largest economy, Brazil, is at a crossroads. Fixing its public finances could open the door to a virtuous cycle of expansion; failing that, it risks slipping deeper into junk-level credit ratings and sub-par growth. Much depends on the nation’s costly pension system, the target of the first sustained legislative push by President Jair Bolsonaro and his economic team. Mustering lawmaker support for pension reform failed as recently as 2017 under former President Michel Temer, and Bolsonaro’s effort is already running into headwinds.

1. Why is pension reform so important?

Brazil’s pension expenditures are already high compared to other countries, and a rapidly aging population makes the current system a ticking time bomb. Brazil spends the equivalent of 13 percent of gross domestic product on social security, well above the average of 8 percent for G-20 nations, according to a government report published in December. The pension fund for private sector workers is expected to run a deficit of 218 billion reais ($54.7 billion) this year up from 195.2 billion reais in 2018, while the fund for public servants will also be in the red. At present, Brazil’s economically active population pays for retirees’ pensions. The number of citizens over the age of 65 will jump to 25.5 percent of the population in 2060 from just 9.5 percent now, according to the national statistics agency.

2. What is Bolsonaro’s plan?

His government, under Economy Minister Paulo Guedes, wants to establish minimum retirement ages -- 65 for men and 62 for women, with a transition period of 12 years. Currently, retirement is determined by a formula that considers both age and contribution time, allowing some workers to claim benefits as early as in their 50s. Bolsonaro would also implement individual savings accounts for workers who enter the labor market, so that future generations will be responsible for saving for their own pensions. The goal of those and other steps is to generate roughly one trillion reais in savings over 10 years.

3. What’s been the response?

Lawmakers have said the government can expect a fight over key points such as minimum retirement ages and higher contribution periods for rural workers. The government has already altered parts of the bill including maximum retirement ages for civil servants and severance payments for employees who previously retired under the state pension plan. Further changes are expected to be made to secure support as it advances in Congress.

4. Where do things stand?

The administration lost valuable time due to miscommunication and infighting that delayed its pension-reform bill. It was sent to Congress on Feb. 20 as a constitutional amendment, meaning that it will be subject to a lengthy approval process and heightened scrutiny from lawmakers. To clear the lower house, the bill will have to win support of 308 of 513 deputies in two separate votes. In the Senate, it will need to be approved by a commission and then by 49 of 81 senators in two separate votes. Since Brazil has more than two dozen political parties, assembling a majority in either house is no easy task.

5. What are investors hoping to see in the reform?

Investors reacted positively when the outline of the proposal was made public. For many of them, the closer the projected savings are to 1 trillion reais, the better, though many expect a final number closer to 600 billion reais. Also important is the timeline for approval. While seen as extremely unlikely, passage in the first half of the year would elate investors. A more realistic scenario is approval in the third quarter.

6. What happens if it isn’t approved?

Failure to change the pension system would most likely prompt a massive selloff. Analysts would lower their forecasts on local assets ranging from the stock market to the currency. Ratings agencies could downgrade Brazil’s sovereign debt rating further into junk, thus raising the government’s borrowing costs as pensions swallow up an ever-increasing percentage of the budget. The central bank would likely be forced to raise the benchmark interest rate to fend off inflationary pressures from a weaker real and help prevent sharper declines in investor confidence. Put together, those factors would hamstring Brazil’s already slow recovery in investments and economic growth.

--With assistance from Josue Leonel, Vinícius Andrade and Patricia Lara.

To contact the reporters on this story: Rachel Gamarski in Brasilia at;Simone Iglesias in Brasília at

To contact the editors responsible for this story: Raymond Colitt at, Matthew Malinowski, Laurence Arnold

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